Usually, depository institutions like banks, custodial institutions like mutual funds, investment entities like hedge funds or private equity funds, and certain types of insurance companies that offer products cash value or annuities are required to comply with Fatca
Once deemed compliant or exempt, there would not be too much work hassles which will reduce costs and less burden on the team. — File photo
In our previous article, we discussed the fact that the Foreign Account Tax Compliance Act (Fatca) was introduced by the United States (US) in 2010 to combat tax evasion. Unless exempt and found to be compliant, foreign financial institutions (FFIs) are required to report information about financial accounts held either by the specified U.S. person or by non-financial foreign entities (NFFEs) in which U.S. persons specified hold a substantial interest.
Usually, depository institutions like banks, custodial institutions like mutual funds, investment entities like hedge funds or private equity funds, and certain types of insurance companies that offer products cash value or annuities are required to comply with Fatca.
To effectively implement Fatca, the United States signed Intergovernmental Agreements (IGAs) with the United Arab Emirates (US-UAE IGA) in 2015 and 112 other jurisdictions. Under UAE law, all entities within the UAE must comply with the US-UAE IGA, and entities can be classified as (i) financial institutions (FIs); and (ii) NFFEs. FIs can further be classified into (i) reporting FIs and (ii) non-reporting FIs.
Reporting FIs, regulated by the respective regulatory authority like DIFC, ADGM, UAE Central Bank, etc., are referred to as regulated FIs. These FIs are supported by the respective regulatory authority to comply with Fatca. Other reporting FIs that are not managed by any specific regulatory authority are called unregulated FIs and supported by the Ministry of Finance (MoF) in accordance with Fatca.
Annex II of the US-UAE IGA deals with exempt and deemed-compliant FIs, and it has been classified into four categories:
Exempt beneficial owners: Other than funds
The governmental entity, international organization and central bank are the exempt beneficial owners of Fatca other than those relating to a payment derived from an obligation held in connection with a commercial financial activity of a type carried out by a company insurance, a depositary institution or a specified depository institution.
Governmental entities include the government of the United Arab Emirates, any political subdivision of the government such as the emirates which are an integral part of the government and any entity controlled by the government, and all of these are exempt from Fatca compliance.
For the controlled entity, the entity must be wholly owned and controlled by one or more UAE government entities directly or through one or more controlled entities. The income of such entity shall be credited to its account or to the account of any governmental entity, and upon dissolution all of its assets shall vest in any governmental entity.
Exempt Beneficial Owners: Funds
Entities such as broad and narrow participation pension funds, beneficial owner pension funds and investment funds wholly owned by exempt beneficial owners fall under this category and are exempt from Fatca compliance.
Narrow participation pension funds are different from broad participation pension funds, and the key factors are that these narrow participation pension funds have less than 50 participants and non-resident partners are not entitled to more than 20 % of fund assets.
Deemed compliant: FI of small or limited scope
This deemed-compliant category includes financial institutions with local customers, local banks, financial institutions with only low value accounts, and qualified credit card issuers. These FIs have a local presence or the value of the accounts is very low. Each FI under this section has specific conditions that must be met to be classified as deemed compliant.
Deemed Compliant: Investment Entities
This category includes the trust established under the laws of the United Arab Emirates to the extent that the trustee of the trust is a reporting U.S. financial institution, sponsored investment entity and controlled foreign corporation, sponsored equity investment vehicle restricted, investment advisers and investment managers, and a collective investment vehicle. Each category in this section has many conditions that must be met before it is classified as compliant.
Non-reporting FIs are generally not required to report information in the UAE; however, they must provide completed US tax forms or self-certifications to withholding agents to avoid withholding on payments from US sources to them.
Once deemed compliant or exempt, there would not be too much work hassles which will reduce costs and less burden on the team.
Certain savings accounts, life insurance contracts with certain conditions, accounts held by an estate, escrow accounts and partner jurisdiction accounts are excluded from the definition of financial accounts and therefore do not have to be reported by the respective reportable FIs.
Mahar Afzal is Managing Partner at Kress Cooper Management Consultants. The above is not an official but personal opinion of the author. For any questions/clarifications, please write to him at [email protected]